Business News

2009 Pre-Budget Report Summary

Personal Tax

Allowances and rates

There will be no increase in the under 65 personal allowance for 2010/11 which will remain at the current £6,475. The basic rate limit will also be maintained at the current £37,400. Therefore an individual will continue to pay 40% tax rather than the basic rate of 20% when their total income exceeds £43,875.

The 10% starting rate for savings income band (frozen at £2,440) is only available where an individual’s non savings income (broadly earnings, pensions, trading profits and property income) does not exceed the starting rate limit.

Comment

The government had previously announced that where the RPI (measure of inflation) is negative that allowances and tax bands would be frozen.

Changes for 2010/11

The government had previously announced that the personal allowance would be subject to an income limit of £100,000. An individual’s personal allowance will be reduced by £1 for every £2 of adjusted net income above the income limit.

Adjusted net income for these purposes is broadly all income after adjustment for pension payments, charitable giving and relief for losses.

A new rate of income tax of 50% will be introduced from 6 April 2010. This will apply to taxable income above £150,000.

Dividend income is currently taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. A new rate of 42.5% will be introduced for dividends which fall into the income band above £150,000.

Example

The effect of the changes can be illustrated as follows:

 

2009/10

2010/11

   

tax

 

tax

 

£

£

£

£

Non dividend income

200,000

 

200,000

 
Personal allowance

(6,475)

 

Nil

 
 

——–

 

——–

 
Taxable income

193,525

 

200,000

 
 

——–

 

——–

 
Taxable at 20%

37,400

7,480

37,400

7,480

Taxable at 40%

156,125

62,450

112,600

45,040

Taxable at 50%    

50,000

25,000

   

——–

 

——–

Total tax liability  

£69,930

 

£77,520

   

——–

 

——–

National Insurance Contributions (NICs)

The NIC rates and limits are broadly frozen for 2010/11 at the 2009/10 figures. There are two exceptions to this in that the lower earnings limit, linked to the state retirement pension, will increase from £95 to £97 per week and there will be an increase in the NIC rate which applies to Volunteer Development Workers. All other rates will be held at the 2009/10 levels.

An increase in the rates of NIC is proposed from April 2011. A further 1% will apply to the rates applicable to employers, employees and the self-employed. The main rate of Class 1 (employee) NIC will be 12% and the Class 4 rate will be 9%. The employer rate will increase to 13.8%. The additional rate of Class 1 and 4 contributions payable will be increased from the current 1% to 2%.

In order to protect those at the lower end of the earnings scale the government has announced that the primary threshold and lower profits limits will be increased by £570. Those paying the standard employee rate and earning below £20,000 will pay less NIC overall as a result of the change.

Comment

The government had previously announced that NIC rates were to increase by 0.5%. This further increase of 0.5% will represent a significant increase in costs for employers.

Furnished Holiday Lettings (FHL)

Unlike general property rental businesses, FHL are treated as a trade for certain taxation purposes, which is generally more preferential in terms of loss reliefs and CGT reliefs. The government had previously announced that it would repeal the FHL rules with effect from 2010/11 but until then it would relax the rule that FHL had to be situated in the UK. Properties situated in the European Economic Area (EEA) qualify as FHL provided they meet the other conditions.

The government has confirmed that FHL will cease to be treated as a trade which will impact for loss relief, capital allowances, pension contribution and CGT purposes. These changes take effect from 1 April 2010 for companies and 6 April 2010 for individuals.

From April 2010 those letting furnished holiday accommodation will be able to claim a 10% ‘wear and tear’ allowance which is generally 10% of the rent less rates. They will also be entitled to claim Landlord’s Energy Savings Allowances on qualifying energy saving capital expenditure incurred on the property. These allowances are currently available against general property income.

Comment

This change had been previously announced when the FHL rules were extended to include properties situated in the EEA.

Tackling offshore evasion

HMRC will be consulting on a package of deterrents and new tools to help them tackle offshore tax evasion. This includes a notification requirement for certain offshore bank accounts and a new tough approach to penalties for offshore non compliance.

Disclosure of tax avoidance schemes (DOTAS)

HMRC have issued proposed rules on the options to strengthen and improve the system under which they receive information about avoidance schemes. The intention is to ensure they continue to receive information early and that they have sufficient powers to penalise those who do not comply with the rules.

Shared Lives carers

From 6 April 2010 income tax relief will be introduced for Shared Lives carers who provide accommodation, care and support for up to three individuals placed with them under a local authority Shared Lives Placement Scheme. The Shared Lives carers must share their homes and family life with the individuals placed with them.

Special Annual Allowance charge – new limits for 2009/10

The Special Annual Allowance (SAA) charge was introduced by some very complex rules in Finance Act 2009. The current rate of the SAA charge is 20% on excess pension contributions. The aim of the charge is to discourage individuals from making significantly higher pension contributions in anticipation of the removal of higher rate tax relief which will occur in 2011. The main features of the charge are:

  • It applies for 2009/10 and 2010/11 to individuals with relevant income in excess of £150,000 in either of those years or the two preceding years and where increased pension contributions have been paid after 22 April 2009.
  • The total pension contributions paid exceed £20,000 (the ‘SAA threshold’). A higher threshold of up to £30,000 may be possible depending on the level of contributions in previous years.
  • The SAA threshold is reduced by the amount of so-called ‘protected’ contributions which are sums being paid at least quarterly under arrangements put in place before 22 April 2009.

It is now proposed to lower the threshold for triggering the SAA charge by reducing the relevant income limit to £130,000 with effect from 9 December 2009. Individuals will be affected by this if their relevant income in 2009/10 or either of the two preceding years exceeds £130,000. For 2009/10 only, protected contributions will include any contributions paid up to and including 8 December 2009.

Example

Mary has relevant income of £140,000 in 2009/10. She makes regular monthly contributions of £2,000 under arrangements which have been in place for several years. She made a one-off contribution of £5,000 in September 2009 and another of the same amount in March 2010. Her basic SAA for the year is £20,000. In her case all the regular contributions plus the September payment are protected and so her SAA reduces to nil.

The contribution made in March will be caught and will be subject to the 20% charge which is payable by Mary.

 

Comment

This will potentially catch a significant number of individuals. It is important to review the level of relevant income for 2007/08 and 2008/09. If in either year the figure is over £130,000 and below £150,000 the new rules will apply irrespective of the income level in 2009/10. If in either year the figure exceeds £150,000 the existing rules will bite.

The rules will catch one-off contributions made by employers as well as lump sum payments made by the scheme member. In either case the charge is on the individual.

SAA rates for 2010/11

The current rate of the SAA charge is 20% on the excess contributions. For 2010/11 the rate will be that necessary to reduce the tax relief on the excess to the basic rate. Bearing in mind that the top rate of tax will be 50%, some of the charge could be at 30% and some at 20% depending on the effective rates at which pension contributions are being relieved.

Removal of higher rate relief for pension contributions from 6 April 2011

Further detail has been provided on the plan to remove higher rate relief on the pension contributions of those with high income.  However some of the detail is still subject to consultation. The rules will apply to those whose gross income exceeds £150,000 and in calculating this limit account will be taken of employer pension contributions.

There will be an income ‘floor’ of £130,000 (excluding employer pension contributions). Any individual with income below this limit will not be affected at all by the rules. If the income exceeds £130,000 then the amount of any employer contribution must be added to establish if the £150,000 limit is exceeded.

Comment

The basis of this calculation will be very important for many family companies where annual employer pension contributions have been a feature of remuneration planning.

Refunded pension contributions

When a registered pension scheme repays contributions to members who leave having completed less than two years service, they are required to pay a tax charge to recoup the tax relief given on the original contributions. That charge is currently 20% on the first £10,800 of refunded contributions and 40% on any balance. Where a refund is made on or after 6 April 2010 the 20% rate will apply to the first £20,000 of refunded contributions and any balance will be taxed at 50%. The charge is levied on the pension scheme.

Lump sums from Employer-Financed Retirement Benefit Schemes (EFRBS)

In certain situations a lump sum, gratuity or other benefit may be paid by an EFRBS to an entity other than an individual. In those cases there is a tax charge payable by the recipient which is currently 40%. That rate will increase to 50% for benefits paid after 6 April 2010.